The Analysis Of The Impact Of China’s Currency Mismatch On Money Supply

Under the background of economic globalization, developing countries generally facethe plight of currency mismatch in the process of integration into the global economy, dueto the existence of original sin. However, both the currency mismatch on debt and thecurrency mismatch on credit will have great impact on a country’s economy. It not onlyaffacts the assets and development of the main micro-economic, and also would have anegative impact on the stability of a country’s financial system, the effectiveness ofmonetary policy and the flexibility of exchange rate policy. Our country’s risk of currencymismatch became highlighted because of a more flexible exchange rate system after theexchange rate system reform in2005.RMB exchange rate has been adjusted to6.6630yuanfor one dollar,has appreciated about19.49%in December13,2010.The paper measures China’s currency mismatch using the applicableindicators-Aggregate Effective Currency Mismatch and Aggregate Currency Mismatchfinding that there is a certain degree of currency mismatch on credit in our country and thedegree has been higher and higher in recent years. Then this paper analyzes currencymismatch’s impact on money supply from both theoretical and empirical.In theory, this paper elaborates China’s currency mismatch’s impact on moneydemand and supply based on the theory of the negative risk premium and the liquidity trap,believing that the RMB appreciation makes the investors enhancing the risk premium dueto the large net foreign currency assets, the monetary authorities will depress our interestrates to maintain the exchange rate,but when the interest rates falls to zero, the existenceof the liquidity trap makes the central bank had to buy too much exchange in the foreignexchange market, allowing the money supply increase.In empirical, this paper analyzes China’s currency mismatch’s impact on moneysupply on the basis of VAR model,using the methods of co-integration analysis,vectorerror correction model and impulse response function based on the quarterly data ofAECM from the second quarter of2003to the forth quarter of2010and the yearly data ofACMAQ from1985to2010and other variables that affect the money supply such as grossdomestic product, gross fixed investment, total expenditure and the inflation rate. Theresults show that China’s currency mismatch on credit has a significant positive impact onthe money supply, affecting the stability of the money supply, reducing the effectiveness ofmoney supply as an intermediate target of monetary policy. Therefore, China should actively weaken our currency mismatch in order to give full play to the money supply asthe intermediate target of monetary policy role.